Monday, September 29, 2008
Crap-sandwich of fat-cats in bankrupt economics.
Politicos, columnists, blogs are screaming offering no clue. Quants and nerds including prospective nobel prize winners in economics presenting their econometric models and differential equations are silent.
The guy who called it a crap-sandwich is prepared to eat it because he voted for the bailout crap.
The problem with the bailout authorisation of $700 billion to be administered by King Henry (Paulson) is that it is too little, too late. The bailout should be more like $700 trillion in tune with the rate at which fetishism of money has grown inventing new money instruments such as swaps, index-based funds, participatory notes. All these derivative money vikalpa (alternative forms) have multiplied the underlying assets of say, $60 economic (say, GDP) trillion to a $600 trillion financial marketplace. The same asset is used again and again to create new forms of money (derivatives) and the certified financial advisers receiving fat salaries act as administrators of these new forms of money, that is, simply buy and sell in the markets.
King Henry cannot control this process of buying and selling. Nor can the Fed.
In a state of bankrupt economics of the Keynesian variety, what is the solution?
Go back to basics. Go back to Kautilya. You know what? The entire great book called Arthas'astra (Treatise on wealth) is not about artha (though a definition of wealth is given as related to work) but about governance.
So intertwined are the issues of governance and fetishism of money.
Just look at the chapters in Kautilya’s Arthas’astra:
Book I, "Concerning Discipline"
Book II,"The Duties of Government Superintendents"
Book III, "Concerning Law"
Book IV, "The Removal of Thorns"
Book V, "The Conduct of Courtiers"
Book VI, "The Source of Sovereign States"
Book VII, "The End of the Six-Fold Policy"
Book VIII, "Concerning Vices and Calamities"
Book IX, "The Work of an Invader"
Book X, "Relating to War"
Book XI, "The Conduct of Corporations"
Book XII, "Concerning a Powerful Enemy"
Book XIII, "Strategic Means to Capture a Fortress"
Book XIV, "Secret Means"
Book XV, "The Plan of a Treatise"
The solution offered by Kautilya is simple and dramatic. The artisan guilds, jaatis, the guild corporations are the bedrock of the creation of wealth. Such a creation of wealth involves two desiderata: work and dharma. This dharma is a tough word for the quants and nerds to understand. This dharma means that there should be a level of sacrifice required in the ruling class, sacrificing personal interest for public good.
This is a tall order. The fat cats care a damn about public good. This is the crux of the financial crisis which Uncle Sam has landed the world in. Make no mistake, we are all in this mess. Every Central Bank will be asked to bail out Uncle Sam who may be left with only option, to bomb his way through the mess, eating crap-sandwich as the army marches on its belly.
This is not a far-fetched prognosis. The economy of Uncle Sam is totally dependent uon the military industrial estate. Hence, the need to bail out General Electric with Indian nuke deal contracts.
US economy: Wall Street bailout analysis - revolt on Main Street
Hours after President George W. Bush put his dwindling prestige on the line to plead for his Wall Street bailout bill, his Republican colleagues in Congress cast it aside amid a revolt from Main Street.
By Toby Harnden in Washington
Last Updated: 9:07PM BST 29 Sep 2008
As the House of Representatives rejected the £380 billion bill and went back to the drawing board, political farce turned into political crisis. Congress – one of the few national institutions to be even more unpopular than Mr Bush – was in a state of paralysis.
The proximity of the November 4th election – when all 435 seats in the House are up for grabs – as well as the interlocking problems of Mr Bush’s lack of political capital and the anger against Wall Street and the Washington class doomed the bill.
No Republican wanted to vote for a bill that their own leader Representative, John Boehner, had just described as a “crap sandwich” and that outraged constituents from coast to coast saw as an immoral formula that left taxpayers footing the bill for the fat cats.
Despite his histrionic return to Washington to broker a deal last week, John McCain, the Republican presidential nominee, gave only lukewarm support to the bill. The bill’s defeat is another blow to his faltering presidential campaign.
Mr McCain’s Democratic opponent Barack Obama chose a more distant but more positive approach but in truth the main problem was always conservative Republicans to whom the nationalisation of large chunks of the US economy was anathema.
Mr Boehner invited his members to vote with "your conscience”. Some did just that while others saw the prospect of political oblivion staring at them if they were up against a Democrat – 95 of whom voted against the bill along with 133 Republicans – who had rejected the bill Mr Boehner had helped negotiate.
The failure of the bill showed how pervasive the "throw the bums out” mentality has spread amongst American voters – who the House, by its nature of serving two-year terms, is intensely reflective of.
Shortly before the vote, one Republican congressman remarked that being asked to back the bill reminded him of being told six years ago: "Don't worry, we'll find the weapons of mass destruction." Mr Bush is now more of a dead duck than a lame one.
The House Republicans' leaders bear much of the blame after delivering just 65 of their votes. As some of their members headed for their constituencies, all they could do was to blame Nancy Pelosi, Democratic Speaker of the House, for the mess.
She had injected a "partisan voice that poisoned our conference" and caused them to "go south", Mr Boehner griped, citing a speech in which she had laid into Mr Bush and trumpeted the superior economic wisdom of Democrats achievements of Bill Clinton's presidency.
Mr Boehner had voted for the bill, though you'd hardly have known it from his words after the fact. "Americans are angry and so are my colleagues," he said. "They don't want to vote for a bill like this. And I understand that."
Representative Barney Frank, House Financial Services chairman, his voice dripping with sarcasm, said it was ludicrous to blame Mrs Pelosi and noted that if just a dozen Republicans had changed their vote then the bill would have passed.
He summed up their stance as, "Somebody hurt my feelings so I hurt my country", adding: "Give me those 12 people's names and I will go and talk uncharacteristically nicely to them and tell them what wonderful people they are."
A shell-shocked Mr Bush could only reiterate that the bill was "big because we've got a big problem". He promised that the White House would "continue to address the economic situation head on" and "continue to move forward".
As he spoke, his White House staff were going back to the drawing board.
A Crisis Resists The Usual Remedies
By Robert J. Samuelson
Monday, September 29, 2008; A19
What we are witnessing, in the broadest sense, is the bankruptcy of modern economics. Its conceit has been that we had solved the problem of stability. Oh, there would be periodic recessions, but the prospects of a major economic collapse were negligible because we knew how the system worked and could take steps to prevent it. What's been so unsettling about the present crisis is that it has not conformed to the standard model of business cycles and has not submitted to familiar textbook solutions.
A hallmark of the crisis has been the stark contrast between the "real economy" of production and jobs and the tumultuous financial markets of stocks, bonds, banks, money funds and the like. Even with the 60 percent drop in housing construction since early 2006, the real economy has so far suffered only modest setbacks. Yes, there are 605,000 fewer payroll jobs than there were in December; still, 137.5 million jobs remain. Meanwhile, financial markets verge on hysteria. The question is whether this hysteria will drive the real economy into a deep recession or worse -- and what we can do to prevent that.
The word that best epitomizes mainstream "macroeconomics" (the study of the entire economy, not individual markets) is demand. If weak demand left the economy in a slump, government could rectify the situation by stimulating more demand through tax cuts, higher spending or lower interest rates. If excess demand created inflation, government could suppress it by cutting demand through more taxes, less spending or higher interest rates.
Economists of this tradition watch consumer and business behavior. Are car sales soft? How much are companies raising prices? What about profits? The $152 billion "stimulus" program earlier this year was a classic exercise in "demand management." It didn't work well mainly because this crisis originated in frightened financial markets. Massive losses on mortgage-related securities caused some financial institutions to fail. As fear spread, financial institutions grew wary of dealing with each other because no one knew who was solvent and who wasn't.
To Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, this financial breakdown now threatens the real economy. Companies depend on bank borrowings and sales of commercial paper (in effect, short-term bonds) to conduct everyday business -- to buy inventories, to pay suppliers and workers before cash arrives from sales. Credit markets were freezing, Paulson and Bernanke decided. Panicky investors were shifting from commercial paper to Treasury bills; banks weren't lending to each other. If it continued, consumers and firms wouldn't get essential credit.
If you reject that conclusion, then the whole crisis has been a contrived farce. Some economists do; they note that downturns always involve losses and disruptions. This one isn't so different. But many economists agree with Paulson and Bernanke. "If we can't calm down short-term credit markets, we're looking at a pretty severe recession," says Michael Mussa of the Peterson Institute for International Economics. "If businesses can't roll over their short-term debt, [they] ask where can we cut back" -- firing workers, reducing spending -- "to avoid bankruptcy."
Unfortunately, we lack experience with stabilizing financial markets, and the issue has been at the fringes of economics. Mostly, markets should operate freely. When is intervention justified? How?
Of course, economists recognized that the Federal Reserve should act as a "lender of last resort" and that permitting two-fifths of banks to fail in the 1930s aggravated the Depression. But the creation in 1933 of deposit insurance (now up to $100,000) was thought to prevent most bank runs, and the "lender of last resort" role never anticipated a worldwide financial system that mediated credit not just through banks but also through hedge funds, private equity funds, investment banks and many other channels. In congressional testimony last week, Bernanke admitted the Fed has been "shocked" at how elastic the "lender of last resort" role has become.
The resulting intellectual vacuum has spawned political chaos. Unpleasant and untested ideas invite opposition. Paulson's plan to buy up to $700 billion of impaired securities is wildly unpopular. It may not work and raises many problems. If the government pays too little for the securities, financial failures may mount; if it pays too much, it may create windfall profits for some investors and losses for taxpayers. But Paulson's plan has better prospects for restoring confidence by removing suspect securities from balance sheets than suggested alternatives would. Selective injections of capital into banks, for instance, might involve favoritism and operate too slowly to improve confidence. Psychology matters.
The economy will get worse. Mussa thinks unemployment (now 6.1 percent) could peak near 7 percent; other projections are higher. The harder question is whether financial turmoil heralds an era of instability. Our leaders are making up their responses from day to day because old ideas of how the economy works have failed them. These ideas were not necessarily wrong, but they're grievously inadequate at the moment.